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17 August 2021
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3 minutes

Structuring and operationalising TSAs for carve-out success

Every transition services agreement (TSA) is specific to the carve-out deal, and aligning the expectations of both the buyer and the seller is critical.

A properly negotiated TSA allows management to focus on significant issues and opportunities and helps reassure employees about the future prospects of the carve-out.

Often the reason companies carve out and sell, or spin off, divisions is because they don’t align with their current business strategy. As result, carve-outs are typically a fraction of the size of their former parent companies and lack the depth of management or scope of corporate services. Understanding how to structure the entities and how to manage local regulatory requirements across multiple markets can consume precious management time and require specific local and global knowledge, as do tasks like appointing a local director, VAT registrations and setting up bank accounts. Functions such as accounting, HR and payroll also need to be provided until the spun-off entity can create its own in-house capabilities.

The parties can enter into what is known as a transition services agreement (TSA) that governs the former owner’s temporary provision of services to the new company. As early as possible in the process, both parties should consider if a TSA is needed, what the scope will include, and what the duration of the TSA will be, based on the complexity of the transaction. Sellers typically want the TSA to be as expensive, short and limited in scope as possible to encourage the carve-out to quickly become completely independent. After all, they have decided to divest the asset and are ready to move on with their core businesses.

The carve-out will be looking for ways to continue essential corporate functions while creating as little distraction and drain on management time by handling basic operational functions. In a carve-out situation, there is often a very lean management team that has significantly more demands on them than they are used to, and not all management processes will be in place on day one.

“What you need for successful TSA is to have absolute clarity. The buyer needs to be absolutely clear about what the seller will be assisting them with,” said Ben Fielding, Managing Director Ireland and the United Kingdom at TMF Group. “What kind of access will they have to the seller after the transaction? For example, does the TSA include phone calls with the seller and the provision of information and documentation the buyer is going to need for a simple and efficient handover? Looking ahead one year or eighteen months into the future, what services will be needed in-house and what should be outsourced?”

TMF Group helps carve-outs anticipate the issues that they will need to address in the TSA, raises flags when necessary and provides the support needed for a smooth transition period. For example, determining what entities need to be set up and which may need to be dissolved.

“Often there is a very long list of activities that need to take place to be operationally ready, and many of those things can take a very long time to complete,” said Michele Museyri, Vice President of Global Sales at TMF Group. “When a buyer finds themselves in a precarious situation, we are there to create a blueprint for them, mapped across multiple countries, with project management plans and timelines to get through the process as quickly as possible.”

Key considerations for TSA negotiations:

  • Scope of services
  • Performance requirements
  • Review and audit rights
  • Data privacy concerns
  • Liabilities
  • Plans for major service continuity issues
  • Pricing mechanisms
  • TSA duration and options to renew/extend

An illustrative TSA timeline:

Phase 1:

  • Services and resources outlined
  • Contracts agreed and signed

Phase 2:

  • Knowledge and data transfers
  • Additional resources acquired

Phase 3:

  • Parallel running of systems and administrations
  • Final handover completed

Get the most out of your TSA negotiations. Contact TMF Group today for support.

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